Alternatives to Bankruptcy

Authored By:
Partnership for Legal Access

Information

If you find yourself facing bankruptcy, there may be alternatives available to you. The alternatives depend on:

The type of debts you have, and

Your specific circumstances

Debts: Secured and Unsecured

There are two types of debts: secured and unsecured.

Secured Debts

Secured debts are debts created to buy property, such as a home loan, auto loan or money borrowed to buy a TV, furniture, or other property.

The borrower pledges a piece of property to the lender, as collateral, to secure the loan. In other words, the lender agrees to advance money to buy the item, and you agree that if you do not pay back the loan, the lender can take the item and sell it to repay the loan.

Collateral is the asset (thing) that can be repossessed to satisfy the amount owed if the borrower does not repay the loan.

Example: Home Mortgage-Ms. Doe goes to Main Street Bank for a loan to help her buy a house. The bank gives her a mortgage loan on set terms. The house itself is the collateral. If Ms. Doe defaults (does not pay) on the mortgage loan, the bank can take the house, through foreclosure, and then sell it to try to make up for their losses.

Unsecured Debts

Unsecured debts are all other debts, such as credit card debts, payday loans, medical bills, etc.

These types of debts are not secured by a specific piece of property acting as collateral.

Example: Credit Cards - Ms. Doe uses her credit card, and, in the past, has been able to pay off the debt. Currently, she has not been able to pay the debt. The credit card company will likely take actions to collect on this unpaid debt, but cannot repossess (take) a specific piece of property to make up for their losses. This is because there is not a specific piece of property acting as collateral, for the credit card debt.

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